On the New Morningstar Mutual Fund Grades

As you’ve probably heard already, Morningstar is in the midst of overhauling its star ranking system for mutual funds. Past performance will be de-emphasized in favor of a more hands-on and foward-looking approach.

SmartMoney tells us what to expect:

As of this fall, Morningstar will unveil what it calls its “analyst rating system,” which will emphasize analysts’ judgment in trying to predict which funds will deliver solid performance in the future. In contrast with the star system, which is strictly based on past performance, funds’ new grades (from AAA to ‘negative’) will also take into account Morningstar’s assessment of fuzzier factors, like the thoroughness of the stock-picking process, the talent of the portfolio manager, and the stewardship of the fund company. It’ll emphasize expenses more than the current star system does, and it’ll be more responsive to changes in a fund’s management or portfolio construction.

And while the star ratings aren’t going away, the addition of the new scoring system could have a huge impact on the fund world.

I use a few of Morningstar’s professional services in my practice and I like their regular website a lot for performance data on the fly. The star rankings have been helpful to me in garnering an at-a-glance sense of whether or not a fund is an outright disaster when assessing a potential client’s holdings.

I wonder whether these new features will have people like me paying more attention for selection and discovery purposes…